A global wealth manager has suggested investors consider including small-cap European equities in their portfolio allocations due to a valuation gap between both their historical valuations and their large-cap peers.
“There are good opportunities when investors take the right approach in the right sectors, particularly where trade buyers and private equity firms continue to show interest in merger and acquisition activity,” GSFM chief executive Damien McIntyre noted.
McIntyre acknowledged Europe has not been immune to current geopolitical volatility, but said it does not mean a recovery in the region has been derailed. Further, he indicated individuals need to prioritise quality companies with significant growth potential when considering what European small caps to buy.
“By focusing on sectors where there are favourable structural trends, such as healthcare, food and beverage, and defence and technology, investors are gaining exposure to companies that display resilient business models, regardless of the broader macro landscape,” he explained.
According to McIntyre, individuals should follow similar strategies to what private equity investors employ, making allocations to companies with a long-term operational focus and adopting an active engagement approach where possible.
“Small-cap companies offer investors the opportunity to get in at ground level and benefit from the growth that happens as companies mature. Small caps are also generally an under-researched sector of the market, with most analysts focusing on larger-cap companies. But this creates real potential for those analysts willing to do the research,” he confirmed.
He pointed out Europe is an attractive geographic region for small caps as it offers the strong regulatory and legislative environments small-cap companies require for growth.
Further, he identified European companies with global growth exposure as an especially good play.